12 January 2004	Monday	19 Ziqa'ad 1424

The Islamabad Declaration issued by the 12th Saarc summit after three-days of deliberation voices its satisfaction with the progress of the South Asia Preferential Trade Agreement. And that has paved the way to the more ambitious South Asia Free Trade Area (Safta) agreement which the summit leaders have happily signed.

But in spite of raising the number of items tradable between India and Pakistan at a concessional tariff to 486 the total volume of intra-Saarc trade is under four per cent of their total external trade.

So the question is: will Safta, which is to come into operation on January 1, 2006, fulfil its vast expectations? One road-block is denial by Pakistan of the Most Favoured Nation treatment to India, which may now become available if the negotiations on Kashmir make some headway.

Yet another question: will Safta come into effect from January, 2006, as scheduled and not be delayed because of procedural problems, although the fears of the smaller and less developed Saarc states have been allayed and the kind of initial protection they wanted for their goods have been provided in the agreement the summit leaders have signed?

Mr Siraj Kassam Teli, president, the Karachi Chamber of Commerce and Industry, says while the volume of trade among the Saarc states is 4 to 5 per cent of their external trade, the intra-regional trade within the European Union is 60 per cent of their trade and within the ASEAN 25 per cent. He wants similar trade between Saarc states to rise to at least 20 per cent initially.

And while some businessmen in Pakistan have misgivings about trading with the larger and more resourceful India, Mr Teli wants the Safta to come into force earlier than 2006 - two years from now and before the quota system for textile exports comes to an end by the end of this year.

Mr Teli says the volume of trade between India and Pakistan is only $237 million. But the volume of smuggling between the two countries is estimated between one and two billion dollars.

A Reuters report from Mumbai says that foreign investment is a problem for both India and Pakistan. India attracted $4.4 billion of direct foreign investment last year but that was less than one-tenth of the foreign direct investment of $52.7 billion which China received at the same time. Pakistan in the same period could receive only $500 to $600 million, which slows down its economic growth.

The report also says the day India's Prime Minister Vajpayee met President Musharraf in Islamabad, the Karachi Stock Exchange's 100 Share Index increased by only 0.6 per cent, while the bench mark Mumbai Sensex Index increased by 0.21 per cent.

But on Tuesday the Karachi index rose by 27.60 points and on Wednesday by over 50 points assured that peace is to return to the embattled suh-continent. The ticklish problem of protection for the less developed or least developed Saarc members has been overcome and they appear to be satisfied with what they got.

There are fears in Pakistan, too, that the larger or stronger economy of India can overwhelm Pakistan. But if Spain and Portugal can join the European Union along with Germany and France, Pakistan cannot be hurt too much by the larger Indian economy. If Pakistan's exports can compete with the Indian exports in textile and other items around the world, it can compete with Indian goods in Pakistan as well through improved performance.

In fact, what Pakistan may lose by competing with India at home initially it may gain through effective bargaining with the WTO collectively as a group of seven states, including India.

The Saarc has also worked out a comprehensive machinery for settlement of disputes, a multi-tier system with a final court of appeal in the name of the ministerial council, with fixed time schedule for each stage of appeal.

Under the system of protection for the weaker states prescribed by Safta, tariff reduction by the non-least developed countries in the Saarc region will be from the existing tariff rates to 20 per cent, and that has to be done within a time-frame of two years from the date Safta comes into effect - January 2006.

Tariff reduction by the Least Developed countries in the Saarc from the existing rates will be to 30 per cent from the date Safta comes into effect. Under Safta, Pakistan and India recently exchanged lists for 486 items for concessional tariff.

Under Ssfta the contracting parties are encouraged to reduce import duties in equal instalments. For the non-LDCs, after the agreement comes into effect, the rates of duties are below 20 per cent and there shall be an annual reduction of 10 per cent on a margin of preference basis for each of the tariff rates for each of the two years.

For the LDCs, if the actual tariff on the date of the commencement of Safta is below 30 per cent there shall be an annual reduction on a margin of preference basis of 5 per cent of the actual tariff for each of the two years.

The subsequent tariff reduction by the non-LDCs from 30 per cent to 0.5 per cent will be done within the second time-frame of five years beginning from the third year after Sapta comes into operation.

There is a 'sensitive list' of items to be protected for the LDCs and another list for the non-LDCs which will be revised from time to time after decent intervals. And there is a mechanism for compensating for revenue loss for LDCs.

Preparatory work for the implementation of the agreement will be completed by the Council of Commerce Ministers and barriers for free flow of trade are to be removed with the help of experts within three months.

Reuters quotes a major businessman from Mumbai as saying that Pakistan may have some problems in importing Indian manufactures because of some of its young industries, but there should be no problem in importing commodities like cotton, wheat, tea, sugar and other raw products in short supply in Pakistan from time to time. The reverse flow could also happen when India is short of such commodities. But more of such trade can take place and at a lower cost if it was allowed by train and trucks and not by ships alone.

The Islamabad Declaration talks of providing for adequate transport facilities for the movement of goods, including for transit. So the rail and bus facilities now made available by both countries for transportation of people will have to be extended to the movement of goods. But the Pakistan government has preferred movement of goods through ships as bus and trucks can lead to increasing smuggling. But shipping is more costly than trucks and trains, argue the Indian businessmen.

The Indian tea producers are looking forward to exporting tea to Pakistan which is the third largest importer of tea in the world. If all goes well they expect tea exports to Pakistan to rise to 7 million tonnes this year and 22 million tonnes by 2005 before Safta comes into operation.

The Safta agreement is a very complex one and Pakistani businessmen will take time to understand its full implications and ultimate gains to them. Meanwhile they are to have a single country exhibition in New Delhi in March and participate in a group exhibition in Mumbai this month.

The Islamabad Declaration also talks of investment by the businessmen of one country in other Saarc countries and public-private sector cooperation.

Meanwhile, the Confederation of Indian Industries had come up with a special study of intra-Saarc trade and says the trade could be doubled every five years from the current annual level of six billion dollars.

The study also suggests that India should take the lead in permitting duty-free import of goods from other Saarc countries which could not hurt India's balance of trade since that is very large.

The study also advocates a common fund to help South Asian nations as well as an investment protection treaty. Pakistan's business organisations have not undertaken such a study and instead left everything to the government. They are going to take sometime to understand the full implications of Safta on which India is very keen.

The study also wants the Saarc countries to make South Asia more attractive for foreign direct investors so that per capita income of Suth Asia could rise from $460.